Turkish Bubble, how it formed and why it will keep deflating
The Turkish Bubble. How it formed and why it will probably keep deflating for years to come.
In short, Turkey was motivated to modernize its economy in the wake of Greece's adoption of the Euro which solved Greece's inflation problem overnight. Turkey proceeded to revalue its currency essentially by removing six zeros from its banknotes. It also made a pledge not to print money but to pursue growth via foreign investment. This took advantage of cheap money in Europe and North America that was eager for medium risk with high reward investment opportunities. The economy grew rapidly with much new construction and many new tech and service industries being developed. Of course as time goes on investments become more risky and less rewarding. This was embodied in the person of Erdogan who steered Turkey away from social and political alignment with Europe and started to pursue unorthodox economic policies based on Islamic doctrine. At the same time, foreign investment in Turkey began to dry up as local businesses began to default on debts. This weakness was seized upon by the market that proceeded to short the Lira until the massive selloff in December 2021, which marked a multi-decade capitulation.
Turkey has now spent all of its foreign reserves propping up its currency. In addition, the Erdogan government has promised to compensate Turkish citizens who decide to keep their savings in Lira. This can only be paid for if the government breaks its promise on issuing bonds and, since they would be essentially worthless right now, only the Turkish central bank will buy them. This is how we print money out of nothing. Brrrrrrrrr
To recap, the Turkish Bubble was made possible by currency manipulation and cheap foreign money. The raising of interests rates in Europe and North America, as well as the printing of money by the Turkish government, means that the bubble cannot be sustained going forwards. It will take a long time, but the inflation of the 1990s will one day return to Turkey.
In short, Turkey was motivated to modernize its economy in the wake of Greece's adoption of the Euro which solved Greece's inflation problem overnight. Turkey proceeded to revalue its currency essentially by removing six zeros from its banknotes. It also made a pledge not to print money but to pursue growth via foreign investment. This took advantage of cheap money in Europe and North America that was eager for medium risk with high reward investment opportunities. The economy grew rapidly with much new construction and many new tech and service industries being developed. Of course as time goes on investments become more risky and less rewarding. This was embodied in the person of Erdogan who steered Turkey away from social and political alignment with Europe and started to pursue unorthodox economic policies based on Islamic doctrine. At the same time, foreign investment in Turkey began to dry up as local businesses began to default on debts. This weakness was seized upon by the market that proceeded to short the Lira until the massive selloff in December 2021, which marked a multi-decade capitulation.
Turkey has now spent all of its foreign reserves propping up its currency. In addition, the Erdogan government has promised to compensate Turkish citizens who decide to keep their savings in Lira. This can only be paid for if the government breaks its promise on issuing bonds and, since they would be essentially worthless right now, only the Turkish central bank will buy them. This is how we print money out of nothing. Brrrrrrrrr
To recap, the Turkish Bubble was made possible by currency manipulation and cheap foreign money. The raising of interests rates in Europe and North America, as well as the printing of money by the Turkish government, means that the bubble cannot be sustained going forwards. It will take a long time, but the inflation of the 1990s will one day return to Turkey.
Comment:
No need for words xD
